5/1/2011

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5/1/2011

May 1, 2011 Leave a comment Go to comments

Table of Contents

Status of Key Market Parameter
Gold Index is Topping with a 7-Month “Three-Peaks and Domed House” Pattern
Silver Index in an 8-Month Bump-and-Run Reversal Top Pattern
Broad Stock Market Broke to the Upside of a 2-Month Inverted Roof Pattern
Market Volatility is below the Panic Threshold
Asset Class Performance Ranking with Oil Leading
Sector Performance Ranking with Biotech Sector Leading
BRIC Stock Market Performance Ranking with Russian Market Leading

Current Status of the LWX (Leading Wave Index)

The LWX Indicator in Last Four Weeks (Past)

The LWX Indicator in Next Four Weeks (Forecast)

Gold Index is Topping with a 7-Month “Three-Peaks and Domed-House” Pattern

Last week I introduced an intermediate term “Three Peaks and the Domed House“ pattern on the gold index, and indicated that gold index was sharply approaching the “Roof” phase of the domed house. On Friday the gold index reached my price target 1540 and even over-shot to 1568 that made a distinct figure for the “Roof” phase. Let’s review what my model says. With my modified version of George Lindsay’s basic model, the “Three Peaks and the Domed House” pattern can be divided into five major phases:

1) Three Peaks phase,

2) Basement phase,

3) First Floor phase,

4) Roof phase, and

5) Plunge phase.

This modified version, using “phase-counting”, is a macro approach to Lindsay’s basic model, and it is different from the classical micro approach using “number-counting” from 1 to 28.

In the following daily chart, the gold index developed the “Three Peaks” phase from last November to last December. It had a separating decline to reach a low at 1308 and formed the “Basement” phase (bear trap) in the late of this January. Then it started a rapid advance in February and built the “First Floor” of the Domed House in March.

Since the early of April, the gold index has been in another rapid advance, and now it is in the “Roof” phase (bull trap) that is the top of the pattern. On Friday the current advance reached my price target 1540 that was a projection based on a measure move with the same length and duration of the advance move right before the “First Floor” phase. In the “Roof” phase of the domed house, the most typically phenomenon is that almost everyone gets very bullish and truly believes much higher prices will come, or even expects shooting the moon. A very good article written by Lorimer Wilson last week documented such an extreme bullish sentiment: 128 Analysts Believe Gold will Go to $5000 or More!

The true range of the gold index on Friday increased dramatically, which indicates that gold prices could become very volatile. Several fireworks should be typical in the “Roof” phase. Based on the model, the next move of the gold index should roll over into the “Plunge” phase which is the last phase of the “Three-Peaks and the Domed House” pattern, with a potential sharp decline of 17% down to the 1290 level for a consolidation, most likely in the time span of May and June. This phase usually has two consecutive powerful down waves, and the second wave is much more severe than the first wave. Please note this model will end as the “Plunge” phase matures and it has no further projection either in the upside or downside after the “Plunge” phase.

Silver Index is in an 8-Month Bump-and-Run Reversal Top Pattern

Silver index is forming a Bump-and-Run Reversal Top pattern in an 8-month time span as shown in the daily chart below. This pattern typically occurs when excessive speculation drives prices up steeply. According to Thomas Bulkowski, this pattern consists of three main phases:

1. A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees. Prices move in an orderly manner and the range of price oscillation defines the lead-in hight between the lead-in trend line and the warning line which is parallel to the lead-in trend line.

2. A bump phase where, after prices cross above the warning line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height. Once the second parallel line gets crossed over, it serves as a sell line. Silver currently is in the bump phase, and its uptrend may continue as long as prices stay above the sell line.

3. A run phase in which prices break below the sell line often causing a bearish reversal to happen. Based on the current projection, the price level of the sell line on Silver index is near 46. If it breaks down 46, the silver index could run into a very ugly sharp decline down to the 39 level or even down more to the 33 level, that should correspond to the “Plunge” phase of the gold index.

Broad Stock Market Index Broke to the Upside of the 2-Month Inverted Roof Pattern

The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, broke through the top horizontal resistance line of the 2-month inverted roof pattern with positive readings of both the trend and momentum. This breakout suggests that the market could become very bullish. Currently the market is above the 89-day moving average and it is in the uptrend zone of the inverted roof pattern. The Leading Wave Index (LWX) indicator, color coded in the price bars of the following daily chart of the Wilshire 5000 index, closed in bullish on Thursday. The LWX is in the neutral time-window for next three weeks and it could turn to bearish time-window in the late of May.

Broad Market Volatility is below the Panic Threshold

The Broad Market Volatility (BIX), measured from over 8000 U.S. stocks, closed at 8 on Thursday and it is below the panic threshold level of 44. The BIX below the panic threshold indicates that the current market is bullish. The BIX is plotted in the following chart as compared with the Wilshire 5000 index.

Asset Class Performance Ranking with Oil Leading

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently oil and gold are outperforming the stock market. The U.S. dollar, treasury bond, and food are underperforming the stock market.

Sector Performance Ranking with Biotech Sector Leading

The following table is the percentage change of sectors and major market indexes against the 89-day exponential moving average (EMA89). The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total market, is 5.36% above the EMA89. Outperforming sectors are Biotech (+8.39%), Energy (+8.12%), and Healthcare (+8.03%). Underperforming sectors are Banks (-1.72%), Financials (+1.87%), and Technology (+3.84%). The Russell 2000 Small-cap (+7.11%) is outperforming the market, and the NASDAQ 100 (+4.91%) is underperforming.

BRIC Stock Market Performance Ranking with Russian Market Leading

The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89). The Russian market is outperforming the U.S. market. The Brazilian, Chinese, and India markets are underperforming the U.S. market.